How to get taxes back taken out of 401K Distribution rollover in error?

[bjryman]

I took a 401K distribution Feb 2015 for real estate transaction that fell through.  Was able to roll over the cash from the distribution within 30 days to new IRA.  However, I mistakenly had 401K provider take out Fed and State Taxes.  Thus, the cash placed in new IRA was short by amount of Taxes paid.

Since those taxes could not be recovered now, and the actual rollover amount submitted by IRA provide excludes the taxes, how do I recover them at time of tax reporting?

I did submit the partial rollover, but of course that shows a significant remainder of taxes paid that are not being returned to me.

[Texas Roger]

When you enter the 1099-R for the distribution into TurboTax, the amount of tax withheld shown in box 4 gets entered as a tax payment on your tax return so you get credit for the taxes paid. As explained in SweetieJean and VolvoGirl's answers, the amount of tax withheld becomes taxable income since it was not rolled over.

[SweetieJean]

Unfortunately, the amount that was withheld is considered to be a distribution to you, and thus taxable itself.

So, if the gross amount was $100,000 but only $75,000 was rolled over, the difference of $25,000 is taxable.

[VolvoGirl]

When you put it in the IRA you had to replace the withholding yourself.  Now the withholding becomes a distribution by itself and taxable and subject to the early withdrawal penalty.  You have to enter the full gross amount before the withholding and say how much you rolled over.  The amount not rolled over will be taxable.  Doesn't matter that you didn't get it.

[bjryman]

So if the total distribution resulted in $80,000 of taxes, but the rolled over amount would reduce that to $40,000, there is no way to file an amended return that shows the IRS took the funds?  BTW, there was no early withdrawal since I am 64.  But then, essentially that means the distribution is all aftertax and that I should not have rolled it over at all but kept it.  Now that there is a new IRA, I will once again owe taxes if I withdraw?  There has got to be a way to either have IRS reconcile what they took or to "unroll over" the current funds to their real after tax status.  Otherwise this is one huge mistake on my part

[VolvoGirl]

You mean you took out 80,000?  When you entered the 1099R you enter the withholding from box 4 for federal and box 12 for state.  The withholding will show up on your tax returns with your other withholding from your W2s, etc. on 1040 line 64.

I didn't follow the rest of your post.  The Distribution is only after tax if you contributed to it with after tax money.  But 401k is pre-tax.  You are not paying tax on the amount rolled over.  Just on the amount you did not roll over.  The amount you put into the IRA will stay pre-tax until you take it out.  (unless you rolled it over to a ROTH IRA).

[SweetieJean]

"the cash placed in new IRA was short by amount of Taxes paid."

[VolvoGirl]

Check your 1040 line 16a and 16b.  Line 16b should only be the amount of the withholding you did not roll over to the IRA and it should say the word ROLLOVER by 16b.

[bjryman]

OK, let me try to explain:
1.  I took a $240,000 distribution from my Fidelity 401K and had 36% taken out by them for Federal and State Taxes.  The net distribution to me was $150,000. Thus, Fidelity dutifully issued a 1099 R showing the distribution.  This happened in early February 2015
2. The real estate investment transaction for which we were going to use the funds fell through, but I still had time to roll over the distribution into a new IRA.  We opened a new IRA with Chase Bank and deposited the $150,000.  Of course the rest of the distribution had been sent to IRS and it was then we were told that there was no way, at that time to "claw back " the tax.  So even though we met the rollover time frame, the IRS held their part of it
3. I was told by Chase that the only way to retrieve the taxes and deposit them in the new IRA was to handle it via my Tax Return.  Trouble is that now I can find no way in Turbo Tax to inform the IRS that they are holding the rest of the funds that should be able to be rolled over
4.  Chase then will issue a confirmation of the rollover for $150,000.  I claimed it on my 2016 filing, but of course the difference in taxes paid to IRS magically just disappearing.  Turbo Tax allowed me to enter the $150,000 rollover which qualifies me for a $55,000 refund, but the rest of the Tax stays with IRS.
5.  At the same time the new IRA would be taxable again!  I had intended to take the $55,000 plus the other $45,000 paid to IRS at the time of the distribution and add it back to the IRA....thus increasing it back up to the original amount.

I can't believe that there is no way to get the taxes paid reimbursed....especially since the IRS has no procedure for getting it back to us immediately after receipt to meet the rollover requirements.  Am I really out the extra $45,000?

[VolvoGirl]

Make sure the federal withholding taxes (1099R box 4) are on your 1040 line 64.  That's where you get credit for it. And you  should only have that same amount showing as taxable on line 16b.    I'll page someone who can explain it better @dmertz

[VolvoGirl]

You had to add back in the 45,000 (and state w/h) from your own money when you deposited it in the IRA.  Then you would get it back later on your tax return. But now you still get credit for the tax withheld on your 1040 line 64.

[dmertz]

I don't think I have much to add.  To avoid any of the $240,000 distribution being taxable, $240,000 would have to have been put into the IRA as a rollover.  Since the amounts withheld for taxes was not rolled over, the sum of amounts withheld remains a taxable distribution.  You get credit on your federal and state tax return for the amounts withheld for federal and state taxes and you'll get back excess withholding as refunds on your federal and state tax return.  However, it's far to late to roll any of the tax refunds into an IRA.  The amount not rolled over remains a distribution on which you will have paid the taxes.  This is the same as if you had simply taken an amount equal to the withholdings out of your 401(k), put the money in a non-retirement account and paid the taxes on that distribution.  It just so happens that the non-retirement accounts where the money was held for a time was your federal and state tax accounts.

As VolvoGirl said, to complete the rollover of the entire $240,000 by the 60-day deadline you would have had to have come up with money from another source while the IRS and the state tax authority had some of your money until refunded.

[bjryman]

OK, Thanks

It seems to me that Chase Bank gave me incomplete guidance when I opened the new IRA regarding how to retrieve the Taxes paid.  I was only encouraged to use the next Tax reporting cycle to recover the funds.  
It now seems that what I should have done was opened a line of credit with Chase, used it to fund the balance of the rollover and then report a full rollover during Tax reporting.
Nice

[VolvoGirl]

Sorry it worked out that way for you.  Sounds like you understand it now.  At least you are not paying tax on the full gross amount.